My Favorite Chart on Earth

http://www.csmonitor.com/Business/The-Reformed-Broker/2011/0118/My-favorite-chart-on-Earth

by sharan • 16 years ago

92 50 16 years ago

aristus• 16 years ago

This suggests that we are in for a long period of inflation.

True, but look at the bright side, following the long period of inflation there will be fantastic growth! But really, are any of us keynesians surprised?

I'm more apathetic to this surprise. Everything looks like linear growth when plotted on a long enough time line, in log log with a fat marker.

qq662• 16 years ago

Of course Korea and First Gulf War are not here, since they would ruin the author's argument. Cue the chorus of people arguing why Korea and First Gulf are "different."

throw_away2• 16 years ago

I don't know if I'm the chorus you're talking about, but they were both much shorter than the ones marked (gulf war 1: 90-91, korea: 50-53). If he shaded those boxes as well to the graph, I don't see it "ruining" his argument. The growth in those four years wasn't exactly spectacular. Very slightly up at best.

qq662• 16 years ago

50-53 growth is as strong as the general trendline. 90-91 is too small to tell.

TomOfTTB3• 16 years ago

The U.S. was only in WWII from 41-45. It was only in WWI from 1917-1918.

Also saying "The war on terror" is kind of misleading since troop levels have varied greatly. To give one example the initial Afghan offensive only involved about 1,300 ground troops. As of 2003 that number was still only at 10,000 (http://www.cbsnews.com/stories/2009/12/01/ap/government/main...)

That's around the same number we had in Somalia (5,300), the '89 Panama invasion (30,000) and several other conflicts. So the fact that the chart starts to level off as of 2001 while these other conflicts don't seem to have made an impact undermines the implied point

MattyDub• 16 years ago

I think you're missing the post's author's point. He isn't saying "after wars the DJIA goes up", he's saying "after periods of inflation, the DJIA goes up" (see the title of the graph).

Note he still doesn't mention 1929-1933, which seems like a big omission, although it doesn't directly contradict the assertion.

6ren• 16 years ago

Interestingly, there is no CPI increase accompanying the present period. Maybe it's delayed a bit, as it was for WWII.

nostrademons2• 16 years ago

They aren't different. There was a post-Korea inflationary period and subsequent recession in 1953-1954 as the Fed restricted monetary policy to quell the inflation:

http://en.wikipedia.org/wiki/Recession_of_1953

There was also a recession brought on by the oil price spikes of the First Gulf War:

http://en.wikipedia.org/wiki/Early_1990s_recession

The trend still holds up, it just wasn't worth mentioning in those cases. I'm more interested in why we got the Great Depression in a period of relative peace.

redthrowaway2• 16 years ago

>I'm more interested in why we got the Great Depression in a period of relative peace.

Speculation. There were very few regulations on the stock market, which led to massive growth across the board. As a result, average people invested their savings in the stock market, because they were all but guaranteed double-digit ROIs. Problem is, stock prices were based on the inflationary pressure of increased investment, not the actual revenues of the companies themselves. When the bubble burst, it hurt everyone. People were worried that their savings would be lost, so they rushed to the banks to withdraw all their money, but the banks didn't have enough to cover their balances, so they shut down. Now, savings weren't insured back then, so when the banks closed their clients lost everything.

As a result of the Great Depression, the government instituted sane financial regulations. Of course, in protecting against busts, they capped growth, so big money types hated them. Thus, neoliberals in the Reagan, Bush (I), Clinton, and Bush (II) administrations systematically removed the regulations that had been put in place to stop serious recessions from happening. There was tremendous growth, then...

This latest recession was entirely foreseeable, and in fact, my friend's grandfather called it. He said in about 2005 that the last time he had seen growth like that, and people generally acting so irresponsibly with their money was right before the Great Depression. In fact, he even called the housing market as the bubble that would pop. I promptly ignored him of course, because he was just some senile old man. Just goes to show, people will only be responsible so long as the pain of their previous irresponsibility is fresh in their minds. When it starts to fade, they get greedy and stupid again.

ThomPete• 16 years ago

Too many amateur investors in the market.

redthrowaway2• 16 years ago

They were shorter and cheaper. They didn't involve the kind of spending that leads to trillion-dollar deficits.

TomOfTTB3• 16 years ago

Iraq is definitely a sink hole. But the War in Afghanistan has cost $370 billion which is $200 billion less than Korea (in inflation adjusted dollars).

http://costofwar.com/en/ http://historical.whatitcosts.com/facts-korean-war.htm

yarone• 16 years ago

Large version of chart, here: http://www.thereformedbroker.com/wp-content/uploads/2011/01/...

Periodic• 16 years ago

Note that the chart uses a logarithmic y-axis, so it is most useful for relative comparisons. Don't try to get absolute data from it as our brains aren't built for doing exponential graph transformations.

ars2• 16 years ago

A logarithmic graph of money! A newspaper (book?) that actually gets it. It's astonishing how many linear graphs of money exist - and they are all worthless and misleading.

And if you need proof that linear graphs of money are misleading then compare:

http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup... http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup...

stoney2• 16 years ago

Is there a simple explanation for non-economics types like me of why the linear graph is misleading and the log one is not?

nc17• 16 years ago

Out of six or seven wars, he picks the ones that make his case. This guy (and anyone tempted to draw any conclusions from this chart) should read A Random Walk Down Wall Street.

http://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

jamesaguilar• 16 years ago

Which other relatively long or expensive wars are missing from this?

Wouldn't the length of a war be difficult to estimate at the outset, and hence be priced in to stock market growth over time? In my economics class they taught us that war is bad for the (real) economy because the country is relatively more invested in the engines of destruction than production, and thus productivity growth in things that make life better is lower. The conclusions of this chart stand to intuitive reason based on that teaching, but I'm by no means an expert.

burgerbrain• 16 years ago

Korea.

But to be fair, Korea was dwarfed by WWII and Vietnam in cost and public awareness. For example, did you know that we're currently technically still at war with North Korea? There's only a cease-fire, no treaty. We still even have troops over there...

charlesju• 16 years ago

I love how economists make all sorts or ridiculous claims by looking at the historical stock market. Two or three data points is not a trend, if you have 3 users and they all register, that doesn't mean your conversion rate is 100%.

Sometimes we forget that 100 years of data is nothing compared to human history and does not signify anything about the future.

edge173• 16 years ago

remember Moore's law? that was based on two or three data points :)

knowledgesale2• 16 years ago

a reference to back up this particular claim maybe?

Keyframe• 16 years ago

but was it a self-fulfilling prophecy?

ramchip2• 16 years ago

The author is not an economist.

Just like people writing about science in the newspapers are rarely actual scientists, people writing about economy in the news are rarely economists.

doron• 16 years ago

I wonder how the graph will continue if we add one possible scenario.

That the war on terror will last for decades to come, escalating conflicts in other locations, say Pakistan or somewhere in the gulf (again)

World wide war without end.. The assertion that the war in Afghanistan is winding down, doesn't strike me as accurate.

In addition the period after the second world war, was marked by a US economic dominance, as Europe was in ruins and the soviet block stifled economic development in almost half the globe for several decades including the Vietnam period until glasnost started to get a footing (in that curious uptick around 1988 perhaps), right till the fall of the Berlin wall.

Things are different now. slightly.

brc2• 16 years ago

All very interesting but the author fails to discuss the survivor bias inherent in the Dow Jones Index (or any other index, for that matter). This is the results of the companies that survived. A lot of companies have dissappeared over this time, both through poor performance or going bankrupt. In fact, GE is the only company that has remained on the index since it's inception.

So unless you're buying index funds that track the DJIA, the chart loses it use. Because when we look at this, we see that the stock market always goes up with time. But what we are looking at is the fact that the 30 largest/most successful companies in the USA keep pace with inflation. Which is hardly a shock.

Note that I'm not arguing some of the authors points, I'm just encouraging an open mind when viewing graphics like this - you've got to know what you're looking for.

jhamburger• 16 years ago

Keep in mind that the majority of the success and growth in the companies in the Dow happened BEFORE they were added to the index, so it isn't factored in. If holding the top 30 US companies was inherently a market-beating strategy, investing would be easy.

simon_• 16 years ago

There is not actually survivorship bias in the DJIA, because changes to its composition are not retroactive. If an index member goes bankrupt, it will absolutely bring the index level down substantially.

brc2• 16 years ago

That is if they are high flying one day, and bankrupt the next. What usually happens is that they slowly sink in size until they are excluded from the index, and some other up-and-coming company is included. It's not common for a company to go bankrupt and be delisted, but it is common for companies to sink lower and be removed, and then perform very badly from then on as index funds sell them down.

So you're correct in that bad performance by a firm in the DJIA will affect the index, however, really bad performance by a company will not be completely reflected in the index, only the first part of their decline. And that will be somewhat mitigated by the inclusion of their replacement, which is usually a growing company.

b_emery• 16 years ago

Some similar charts here, such as S&P Composite since 1871, adjusted for inflation (much more useful in my opinion):

http://dshort.com/articles/SP-Composite-pe-ratios.html

ramchip2• 16 years ago

In war time, the economy appears to stall, since the growth is concentrated in war-related products which do not influence indicators like the consumer price index. After the war ends, the industry goes back to normal and the CPI `catches up', making it look like the war boosted economic growth.

That's how we explained it when I studied economics, at least IIRC.

Edit: just noticed the website name. "The Christian Science Monitor". I feel slightly cheated.

gjm11• 16 years ago

I don't think the performance of the stock market varies depending on whether the person reading the numbers is a Christian Scientist. If it did, that would be even more remarkable and weird than if Christian Science were correct in, e.g., its claims about disease.

(For the avoidance of doubt: No, I am not a Christian Scientist.)

thalur• 16 years ago

The graph is titled (roughly) "500% rises follow inflation". It could just as easily be titled "500% rises are followed by inflation" from the same data.

My Favorite Chart on Earth

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